The Real Estate industry is operating in a new landscape following the Coronavirus pandemic. The market is seeing tenants looking for greater flexibility and often pushing for landlords to share the financial pain of any future lockdowns. The desire to include a “pandemic clause” which suspends the rent if, to prevent or delay the spread of COVID-19, the Government requires the tenant not to use the demised property, is increasing.
Anything is open to negotiation for an incoming retail tenant committing to a lease of new premises. What happens though, in the context of a lease renewal under the Landlord and Tenant Act 1954? Will a court consider favourably a tenant’s proposal to have a “pandemic clause” included in their renewal lease?
The desire to include a “pandemic clause” is particularly prevalent in the retail sector from which, not unsurprisingly, we had the first recorded judgment on a lease renewal and the impact of COVID-19, in WH Smith Retail Holdings Limited -v- Commerz Real Investmentgesellschaft mbH . This case was a renewal of WH Smith’s retail unit at Westfield Centre, Shepherd’s Bush.
WH Smith were an essential retailer and had not been required to close but in a lockdown, they were just one of a few retailers in Westfield left operating and, not unsurprisingly footfall was a shadow of what it was in normal times. The court did not have to decide if a pandemic clause was justified because the principle of there being one had been agreed between the parties and only had to decide if the trigger should be closure of the shop or some other formula as proposed by the tenant. The court found in favour of the tenant that the trigger for a rent suspension should be some regulation which would have the effect of making a reasonable tenant not to want to continue to trade (taking in to account the furlough payments on offer should WH Smith Westfield shut during the lockdown).
The second notable judgment is in relation to S.Franses Limited -v- The Cavendish Hotel (London) Limited  which related to the lease of a textile dealer who occupied premises at 80 Jermyn Street. The tenant’s two leases of the premises had expired in 2016 but were continuing pursuant to the 1954 Act. The judge did not attribute any particular fixed percentage reduction in rental values as a result of the pandemic. Instead, the judge relied on a traditional rent zoning methodology and arrived at a reduced Zone A rent reflecting recent post-COVID-19 comparable evidence. The parties had been unable to agree an interim rent, a significant point given that the leases had contractually expired some 6 years ago. The judge accepted the tenant’s expert valuation of £140,650.00. However the judge concluded that an interim rent of £160,000 per annum was appropriate on the basis that the expert valuation was “too low for at least the first 3.5 years of the occupation, both because of the the difference between it and the passing rent at the end of the existing tenancy, but also because of the evidence about the market value of Jermyn Street properties over that time”.
The landlords’ acceptance of the inclusion of the pandemic related rent suspension clause in the above cases show how these provisions quickly became the market norm, but query whether this attitude is changing again – see further below.
There has been a recent unrecorded case – Poundland Limited -v- Toplain Limited (unreported) 7 April 2021 (County Court) (DJ Jenkins). The county court refused the tenant’s proposal to include a pandemic clause in the renewal lease which would reduce the rent and service charge payable by 50%, in the event of a Government imposed lockdown. The tenant argued that the inclusion of the pandemic clause would modernise the lease following the lockdowns experienced during the COVID-19 pandemic and sought to rely on the case WH Smith Retail Holdings Limited -v- Commerz Real Investmentgesellschaft mbH . The landlord resisted the “pandemic clause” on the basis there is no market precedent to this drafting and that it would fundamentally change the parties’ relationship.
The county court agreed with the landlord, stating that, in line with the principles set out in O’May -v- City of London Real Property Company Limited, the imposition of a pandemic clause would not be fair and reasonable in the circumstances. The purpose of the Landlord and Tenant Act 1954 was not to re-write previously negotiated risks, even though the parties had not considered the National lockdown at the time of the negotiation. It would be unreasonable to impose a sharing of the risk in circumstances over which the landlord would have no control, or a tenant may have some control by reference to Government reliefs or schemes. District Judge Jenkins found the case could be differentiated from WH Smith as, in that particular case, the parties had already agreed that a pandemic rent suspension clause should be included in the lease and the court was simply determining the mechanics of how it would operate.
Whilst Poundland Limited -v- Toplain Limited is a county court decision and therefore has no binding effect on future cases, it is an interesting example how the COVID-19 pandemic has affected lease terms and how the insistence of including a pandemic clause will not always succeed.
If you have any rent related or other landlord and tenant issues you would like to discuss, please contact a member of the Commercial Property Disputes team.